An interest rate is the percentage charged on a loan or paid on savings, typically expressed annually. It represents the cost of borrowing money or the reward for saving it. For example, if you borrow $100 at a 5% interest rate, you will owe $105 after one year. Interest rates can vary based on factors like the economy, inflation, and the policies of central banks like the Federal Reserve. Higher interest rates can discourage borrowing and spending, while lower rates can encourage them, influencing overall economic activity.